Putting a Face on America’s Estate Tax Returns

Taxes

Supporters of the federal estate tax often defend it by saying that “because it only affects the heirs of the wealthiest Americans—fewer than one in 1,000 estates—the estate tax is the most progressive part of the tax code.” Despite the relatively small number of estates that pay the tax, there are real people behind these returns. Recently released data from the IRS puts a face on who filed estate tax returns in 2021 and who ultimately paid those estate taxes. The data indicates that the federal estate tax most impacts the estates of decedents who had ownership stakes in successful private businesses.  

The federal estate tax currently applies to estates over $12 million for single filers and $24 million for joint filers, levied at a top rate of 40 percent. The exemption amount is adjusted for inflation each year. The IRS recently announced that the threshold for singles in 2023 will jump to $12.9 million.

However, the latest IRS data is for filing year 2021, when the exemption was $11.70 million for singles and twice that for couples. The IRS notes that returns filed in one year are often for deaths that occurred in prior years. For example, 2021 returns were likely for deaths that occurred in 2020 or earlier. It is uncertain how much COVID-19 impacted the number of 2021 returns.

For the purposes of this report, we will compare 2021 data to the most recent non-COVID-19 year, 2019, in which the exemption amount was $11.40 million.

Many Federal Estate Tax Returns Were Filed, Fewer Were Taxable

Table 1 shows the number of federal estate tax returns filed in 2021 and 2019, the various sizes of those estates, and the number and worth of taxable returns. We can see that 6,158 returns were filed in 2021, slightly less than the number of returns filed in 2019. Yet the 2021 returns had a total valuation of nearly $190 billion compared to $159.6 billion in 2019.

More than half of the 2021 returns were in the $10 million to $20 million range. Only about 10 percent of these returns represented estates valued at over $50 million, yet these larger estates represented nearly half (46 percent) of the total value of all returns filed that year.

However, after accounting for the 2021 exemption, 2,584 returns—52 percent—were determined to be taxable. Their total net valuation was $98.3 billion after subtracting various payments to executors, payouts to heirs, and state taxes. Roughly two-thirds of the estates valued at over $50 million were taxable.

In 2019, 48 percent of overall returns were taxable while 55 percent of returns valued at over $50 million were taxable.

Table 1: Total Federal Estate Tax Returns and Taxable Returns in 2021 and 2019
  All Returns Filed Taxable Returns  
Size of Gross Estate Number Amount
(in thousands)
Number Amount
(in thousands)
Percentage Taxable
2021 Returns          
Total 6,158 $189,647,122 2,584 $98,318,430 52%
Under $10 million 532 $4,008,485 233 $1,738,376 43%
$10 million < $20 million 3,284 $47,162,709 1,118 $16,434,671 35%
$20 million < $50 million 1,737 $50,927,770 865 $25,504,334 50%
$50 million or more 605 $87,548,158 369 $54,641,049 62%
           
2019 Returns          
Total 6,409 159,698,178 2,570 77,237,685 48%
Under $10 million 1,975 13,790,422 648 4,527,552 33%
$10 million < $20 million 2,698 38,101,066 1,020 14,854,607 39%
$20 million < $50 million 1,265 37,369,180 636 19,170,296 51%
$50 million or more 471 70,437,509 265 38,685,229 55%
Source: IRS.

Profiling the Taxable Returns

Let’s look more closely at these taxable returns. Table 2 shows how much tax was paid by estates at each value level and the average amount of taxes paid.

In 2021, 2,584 taxable estates paid over $18.4 billion in taxes—roughly $7.1 million each on average. The largest estates paid well over half of all the estate taxes paid in 2021—an average of $30.5 million each.

By contrast, in 2019, 2,570 taxable returns paid a total of $13.2 billion in taxes—an average of about $5.1 million each. The largest estates in 2019 worth $50 million or more paid an average of about $24.6 million. (The figures for 2019 and 2021 do not include the amount of gift taxes paid each year.)

As advocates of the estate tax suggest, the substantial share of taxes paid by the largest estates is one reason the estate tax is seen as the most progressive tax in the federal code.

Table 2: Net Estate Taxes Paid in 2021 and 2019
Size of Gross Estate Number Total Amount Paid
(in dollars)
Average Amount Paid
(in dollars)
       
2021 Taxable Returns      
Total 2,584 $18,419,450,000 $7,128,270
Under $10 million 233 $177,715,000 $762,725
$10 million < $20 million 1,118 $1,779,850,000 $1,591,995
$20 million < $50 million 865 $5,175,373,000 $5,983,090
$50 million or more 369 $11,286,513,000 $30,586,756
       
2019 Taxable Returns      
Total 2,570 13,214,991,000 $5,142,020
Under $10 million 648 441,953,000 $682,026
$10 million < $20 million 1,020 2,061,750,000 $2,021,324
$20 million < $50 million 636 4,188,148,000 $6,585,138
$50 million or more 265 6,523,140,000 $24,615,623
Source: IRS.

The Federal Estate Tax is Another Layer of Tax on Successful Private Businesses

Table 3 summarizes the major assets reported on taxable federal estate tax returns. As we’ll see, the federal estate tax is not just a tax on “wealth”—it is often a tax on the value of successful businesses, both publicly traded and privately held. To a lesser degree, it is a tax on real estate, bonds, cash, and art.

The largest single category of assets claimed on federal estate tax returns in 2021 was some $29.9 billion in publicly traded stock, followed by $11.5 billion in bonds, and $8.2 billion in cash. But ownership stakes in various privately owned businesses comprised an even larger amount ($19.6 billion in total), though they were separated into at least four categories based on how the business was structured.

The first of these privately owned asset classes was closely held stock, totaling $6.1 billion. This indicates that the decedent had an ownership stake in an S corporation or a privately owned C corporation. The second asset class was $4.7 billion in “Other Limited Partnerships,” which include the value of all limited partnerships other than private equity and hedge funds. The third was roughly $4.4 billion in noncorporate business assets, which include sole proprietorships, general partnerships, and LLCs. The fourth asset class was $4.3 billion in real estate partnerships.

Another major asset class was “Private Equity and Hedge Funds” valued at $4.0 billion. Personal residences were valued at $2.9 billion, while art was valued at $1.7 billion. The “Other” category totaling $14.2 billion includes assets such as life insurance, farm assets, mortgages, and unclassifiable mutual funds.

The takeaway from this data is that the federal estate tax hits privately owned businesses of varying types collectively more than other categories of assets. Thus, it is often a second or even third layer of tax on those successful businesses.

Table 3: Major Assets of Taxable Estate Returns in 2021
Asset Type Amount
(in thousands)
Publicly Traded Stock $29,938,417
Bonds $11,599,404
Cash $8,268,603
Closely Held Stock $6,115,376
Other Real Estate $6,041,067
Other Limited Partnerships $4,762,304
Other Noncorporate Business Assets $4,391,777
Real Estate Partnerships $4,371,072
Private Equity and Hedge Funds $4,012,259
Personal Residence $2,905,124
Art $1,745,746
Other $14,167,280
Total $98,318,430
Source: IRS.

Decedents Came from Diverse Occupations

The IRS identified 18 separate occupational categories for the decedents of estate tax returns in 2021 (Table 4 lists the top 10). Unsurprisingly, a plurality of decedents was identified as working in business and financial operations—35 percent of all estate tax returns and 32 percent of taxable returns. These estates paid one-third ($6.8 billion) of the $18.4 billion in taxes paid by estates in 2021.

The next largest occupational labels are “retired” (12 percent) and “other ” (11 percent), which is comprised of everything from homemakers to philanthropists. These catch-all categories are followed by management, with 8 percent of all estate tax returns, followed by health care practitioners at 5 percent, and legal, farming, and sales at 4 percent each.

The remaining occupations are quite diverse. They include arts and entertainment, education, and architecture. Each of these categories comprises 3 percent of all estate tax returns.

Table 4: Top 10 Occupational Profiles of Decedents in 2021
  Net Worth Net Estate Tax (Taxable Returns)
Decedent Occupation Number Percentage of Total Amount
(in thousands)
Number Percentage of Total Amount
(in thousands)
All Occupations 6,157 100% $182,239,009 2,584 100% $18,419,450
Business and Financial Operations 2,136 35% $75,968,359 815 32% $6,885,643
Retired [2] 764 12% $18,247,996 483 19% $2,745,810
Other [1] 702 11% $20,835,133 339 13% $2,831,484
Management 504 8% $17,308,567 200 8% $1,526,162
Healthcare Practitioners and Technical 305 5% $5,981,317 88 3% $331,622
Legal 274 4% $5,690,789 85 3% $280,084
Farming, Fishing, and Forestry 263 4% $6,571,805 107 4% $920,060
Sales and Sales-Related 226 4% $6,547,493 83 3% $546,165
Arts, Design, Entertainment, Sports, and Media 212 3% $6,527,792 89 3% $617,066
Education, Training, and Library 205 3% $4,271,073 78 3% $357,763
Architecture and Engineering 157 3% $3,452,173 49 2% $323,662

[1] Examples of occupations in this category include occupation not present, not employed, student, philanthropist, or homemaker.

[2] If the preparer indicates that the decedent is retired, and an occupation or business is listed categorized as the decedent’s occupation. However, if the filer only indicated that a decedent is retired the decedent’s occupation is placed in the Retired category.  

Source: IRS.

More Female Decedents Paid Estate Taxes Than Male Decedents

The IRS data provides an interesting look at the gender of decedents. If we look at just estate tax returns in 2021, male decedents outnumber female decedents by 60 percent: 3,805 to 2,351. And, on average, the net worth of the estates of male decedents is larger than the returns of female decedents: $30.9 million to $27.3 million.

However, if we look at the estates that owed taxes, a slightly different picture emerges. First, and perhaps because women tend to outlive their husbands, the number of tax-owing estates of female decedents is larger than those of male decedents, 1,370 to 1,215. Despite this small disparity, the estates of male decedents still pay slightly more in taxes than the estates of female decedents, $7.4 million compared to $6.9 million.

Table 5: Gender of Decedent in 2021 Federal Estate Tax Returns (figures in thousands)
Male Decedents Female Decedents
Net Worth Net Estate Tax Net Worth Net Estate Tax
Number Amount Number Amount Number Amount Number Amount
3,805 $117,887,742 1,215 $8,990,307 2,351 $64,351,267 1,370 $9,429,143
Average $30,982   $7,399   $27,372   $6,883
Source: IRS.

Large States Lead in Federal Estate Tax Returns Filed

It is not surprising that the largest and wealthiest states account for the most estate tax returns filed in 2021. Indeed, as Table 6 illustrates, the top five states—California, Florida, New York, Texas, and Illinois—account for more than half of all estate tax returns filed that year. Moreover, those five states accounted for $10.0 billion of the $18.4 billion in estate taxes paid in 2021.

Interestingly, both Illinois and New York have estate taxes levied at the state level as well. The top estate tax rate in both Illinois and New York . By contrast, California, Florida, and Texas do not levy state-level taxes on estates.

In the next tier, Massachusetts also has its own state-level estate tax as high as 16 percent. New Jersey and Pennsylvania each levy state-level inheritance taxes. Neither Colorado nor Virginia levy estate or inheritance taxes.

Table 6: Top 10 States with Estates Filing Tax Returns in 2021
State Estate Tax Returns Filed Gross Value of Estate Returns (in thousands) Taxable Estates Net Estate Tax (in thousands)
California 1,156 $38,589,017 519 $3,615,363
Florida 830 $25,691,671 349 $2,515,345
New York 557 $21,270,466 221 $2,344,495
Texas 403 $11,391,714 194 $1,077,662
Illinois 206 $6,160,099 79 $511,151
Pennsylvania 180 $5,812,425 79 $907,120
New Jersey 192 $5,453,497 68 $373,656
Colorado 104 $5,290,761 52 $315,159
Virginia 122 $5,003,321 53 $438,336
Massachusetts 176 $4,244,513 73 $344,523
National Total 6,158 $189,647,122 2,584 $18,419,450
Source: IRS.

While supporters of the federal estate tax may be correct that only a fraction of estate tax returns eventually pays the estate tax, IRS data shows that it disproportionately impacts estates tied to successful privately owned businesses. Thus, it acts as a second or third layer of federal tax on these successful businesses over the owners’ lifetime.

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